TFR reform makes headway in Italy

The Italian reform on severance payments, the Trattamento di Fine Rapporto (TFR), which hopes to lessen the burden of the country's troubled public finances, is showing some signs of success, according to data released on 19 September by Covip, the Italian pension fund watchdog.

The positive effects reform for pension funds of the TFR, which came in force in January this year, are already showing up as a sizeable number of Italian private sector workers have subscribed to pension funds rather than leaving their severance payments to be dealt with by the state.

According to Covip's annual report, in the first six months of this year 900,000 private sector workers subscribed to complementary pension solutions. Italian pension managers saw a 50% increase in subscriptions from the end of 2006, and the total in the period going from 1.8m to 2.7m.

The reform, which affected around 12.2m private sector workers, meant that they had to choose by the end of June between leaving the funding of their severance pay with their company or shifting the assets to private pension funds. Employees who kept their severance pay with their company will get a cash bonus as they leave. Those choosing private funds are entitled to a complementary pension for their life in retirement.

The 2.7m figure represents 22% of the total number of employees affected by the reform, which is hardly an impressive figure. However, the data look slightly better when it is considered that of the 12.2m affected, around 4m could already choose private funds before 31 December. The 900,000 new subscriptions received since January should be compared with the remaining 8m employees.

Alessandro Zanon of PreviGen, the open fund of Assicurazioni Generali with €328m of assets under management at December 2006, says: "It is certainly a positive sign. There is finally a turn towards complementary pension solutions, and most importantly employees will not stop developing an awareness of the importance of subscribing to the second pillar. These good data say that the industry will continue developing in the future."

He adds: "I think the data reflect that a better effort in terms of information for workers eventually resulted in increased trust in complementary pension solutions. This is surely a sign that the situation is moving toward a better awareness of the importance of the second pillar. But it is more difficult to establish whether these decisions show a new trend towards saving and investment habits."

Zanon thinks that the estimate of €5-6bn of inflows made by the government is optimistic for this year, pointing out that most subscriptions were made over the last month, although he says that number could easily be reached next year.

The data show that closed pensions funds still account for the majority of subscriptions, but that open pension funds and other schemes saw a good increases in subscriptions too. Of the 900,000 subscribers, roughly 600,000 moved to closed pensions funds, 190,000 went to open pension funds and the remainder chose a tax-advantaged individual pension plan, called PIP. Many people who chose open pension funds are said to have preferred compartments with a cautious management of the funds.

Apart from the increase in subscribers, modest by numbers but significant in relative terms, the most interesting sign seems to be small number of ‘silenzio assenso' or ‘silent consent' workers, those who by the end of June had not disagreed with a move of their TFR to a pension fund. "It would be important to know whether all the subscriptions have been voluntary," says Zanon. "I believe that most ‘silent' workers did not make a choice because they knew that they did not have to communicate their choice if they wanted their severance pay to be shifted."

Andrea Girardelli of Fonchim, a €1.7bn closed fund for chemical and pharmaceutical workers, is of the same opinion: "The interesting part is the number of ‘silent' workers. We only saw very few of them at Fonchim, and as it stands we had 698 new ‘silent' subscribers and out of 41,692 new subscribers at 31 August." He says Fonchim will have to react to the positive subscription data, and one of the early initiatives on the cards is setting up a guaranteed compartment.

In terms of the impact of the reform on single funds, Zanon confirms that there was a positively affect on size of contributions to PreviGen. While the number of subscribers to the fund increased by 8%, contributions shot up by more than 25%.

Highlighting the fact that many young people are still not addressing the need to save for their retirement, Covip's annual report gave an update on the impact of the recent turmoil on the financial markets on Italy's pension fund industry. It said that a limited number of funds, which were exposed to collective investment schemes that were themselves investing in sub-prime-related instruments, were affected, but that the system did not suffer substantially.